The recent decision of Khayam v Navitas English Pty Ltd [2017] FWCFB 5162 (“Navitas”) has significant implications for how maximum term employment contracts interact with unfair dismissal laws.

What is a “maximum term” contract?

A maximum term contract is a contract which is for a specified period (for example, six months) but can be terminated by an employer, with notice, prior to the expiration of that specified period.

What do the unfair dismissal laws say?

 Section 386(1) of the Fair Work Act 2009 (Cth) (“FW Act”) provides that:

“(1) A person has been dismissed if:

(a) the person’s employment with his or her employer has been terminated on the employer’s initiative; or

 (b) the person has resigned from his or her employment, but was forced to do so because of conduct, or a course of conduct, engaged in by his or her employer.”

Accordingly, an employee can only bring an unfair dismissal claim if they have been dismissed in accordance with this section.

How have maximum term contracts been treated in the past?

 Since the case of Justice v Lunn (2006) 158 IR 410, it has generally been accepted that an employer does not face unfair dismissal exposure when a maximum term contract is not renewed, as the cessation of employment has not been at the initiative of the employer, but rather simply at the expiration of the contract.

Therefore, previously, employers who had allowed an employee’s employment to end upon the expiry of a maximum term contract were not considered to have dismissed an employee and were not exposed to the risk of an unfair dismissal claim being brought by an employee against them.

What does the new decision mean?

 As a result of the new decision in Navitas, employers can no longer assume that the expiration of a maximum term contract will exclude them from an unfair dismissal claim.

Instead, the Fair Work Commission has held that a five step assessment process should be conducted to determine whether there has been a termination at the initiative of the employer and an employee is able to bring an unfair dismissal claim after their maximum contract term has expired:

1. You must consider termination of the employment relationship, not just the termination of the employment contract.

2. If the employment relationship is not left voluntarily by the employee, the focus of the inquiry will be on whether an action on the part of the employer was the principal contributing factor which results, directly or indirectly or consequentially in the termination of the employment.

3. In circumstances where the parties agree that their contract will expire on a specific date, but have not agreed on the termination of their employment relationship, this does not exclude the possibility that the termination of the employment relationship occurred at the initiative of the employer.

4. Where the terms of a maximum term contract reflect a genuine agreement on the part of the employer and employee that the employment relationship will not continue after a specified date, then absent any vitiating factor or other factor in point five below, the employment relationship will have been terminated by reason of the agreement between the parties and not at the initiative of the employer.

5. In some cases, even if there is an agreement to terminate the relationship on a specific date, it is necessary to go even further and consider whether one of the following vitiating or other factors will apply:

  • the employee entered into the contract as a result of misrepresentation, misleading conduct, duress or coercion, serious mistake about its contents or subject matter, or some other unconscionable conduct;
  • the contract is illegal or entered into for the purpose of avoiding the unfair dismissal laws;
  • the contract has been varied, replaced or abandoned by way of a separate agreement between the parties;
  • the contract does not represent the reality or totality of the terms of the employment relationship between the parties (for example, the contract may not be limited to the terms of a written document);
  • during the term of the employment relationship, the employer may have engaged in conduct or made representations (for example, to the employee that their employment would continue subject to conduct and performance, notwithstanding the time limit set on their employment) which would prevent the employer from relying on the terms of the contract as the means by which the employment relationship has been terminated; or
  • the terms of the contract are inconsistent with the terms of an award or enterprise agreement which prohibit or regulate fixed term employment.

If one of or more of the above apply, then an unfair dismissal claim may still be available to an employee.

What does this mean for employers?

 If you are an employer who engages maximum term employees and you do not intend on renewing their contract, you will need to ask yourself whether your contracts are exempt from the unfair dismissal laws and consider whether any of the vitiating or other factors listed in point five above apply.

If the unfair dismissal laws apply to your contracts, you will need to ensure that there is a valid reason (for example performance, conduct or operational reasons) which justifies not renewing an employee’s contract.

If you are considering terminating an employee who is engaged under a maximum term contract, contact the HR Law team for advice.

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